Lennar Corp (LEN) 2011 Q4 法說會逐字稿

Welcome to Lennar's fourth quarter earnings conference call.

At this time, all participants are in a listen-only mode.

After the presentation, we will conduct a question-and-answer session.

Today's call is being recorded.

(Operator Instructions) I will now turn the call over to Mr David Collins for the reading of the forward-looking statement.

Today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future business and financial performance.

These forward-looking statements may include statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies, and prospects.

Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those described under the caption - Risk Factors contained in Lennar's annual report on Form 10-K, most recently filed with the SEC.

Please note that Lennar assumes no obligation to update any forward-looking statements.

I would like to introduce your host, Mr Stuart Miller, CEO.

Sir, you may begin.

Good morning and thank you everyone for joining us for our fourth quarter and year-end 2011 update.

We're very pleased to detail our results for you this morning.

As always, I'm joined this morning by -- Bruce Gross, our Chief Financial Officer; Diane Bessette, our Vice President and Treasurer; and Dave Collins, our Controller.

Additionally -- Rick Beckwitt, our President; Jon Jaffe, our Chief Operating Officer; and Jeff Krasnoff, Chief Executive Officer of our Rialto segment are here to participate as well, as we have all just been together and completed our year-end review and our 2012 look-ahead with our Regional and Division Presidents here in Miami.

I'm going to begin this morning with some brief opening remarks about the state of the current housing market in general.

Rick and Jon will comment on aspects of Lennar's Home Building operations, Jeff will update performance in our Rialto segment, and finally Bruce will provide detail on our quarter and year-end numbers.

After Bruce, of course, we will open the phone lines to your questions and we request as always that in our Q&A period that everyone please limit to just one question and one follow-up so that we can be as fair as possible to everybody who would like to ask.

So, two days ago, on CNBC, Jamie Dimon of JPMorgan highlighted that he believed that housing was at or nearing the bottom of this downturn.

And I believe he is correct.

I previewed in our third quarter conference call three months ago, that we were beginning to see evidence of a genuine turn in the residential housing market.

And that this could be a harbinger of market stability.

Last quarter I was not ready to conclude that a real trend had been identified.

This quarter I'm feeling somewhat more confident that the market is in fact changing.

As I noted earlier, we have just completed our two day review of all of our operating divisions across the country.

We've looked back at our 2011 results and we've looked ahead to 2012 expectation.

The consistent message is that the general environment is different this year than it has been in the past.

There are discernible fundamental shifts appearing in the home market and there are empirical complements that are to date confirmatory that the market is showing signs of stability.

Home prices and volumes have been falling for seven years now.

Prices are down some 20% to 50% depending on the market and new home starts and sales are at post-depression lows.

Concurrently, interest rates are at historic lows.

According to HUD, homes are more affordable to purchase today than they have been since 1971, as a result of these falling home prices and low interest rates.

Today's consumers are beginning to realize that housing represents an undeniable value proposition and accordingly, demand is growing and we are seeing it in the field at most of our communities.

Now, demand is constrained by the mortgage qualification standards and processes that defined today's mortgage market and that has been over corrected by the severity of the downturn.

But the demand is growing and looking to find some loosening of those credit standards.

Today's consumer is looking at the home purchase differently than in past years.

The home purchase is no longer the place to invest savings in order to ride a wave of price increases.

Instead, today's buyers are looking for real value and they are finding real value in For Sale housing.

First, the fully loaded cost of ownership is lower in most desirable markets than comparable rental rates.

While this might not show up in national statistics, in local competitive markets -- principle; interest; taxes; insurance; community association costs; and lawn care are together lower than the competitive rental market.

Today, For Sale housing represents an excellent value proposition.

Secondly, they are looking for an alternative to the rental market.

Rental prices are high and they have been moving up and they reprice every 12 months.

Today's consumers are looking for a domicile that provides living cost stability as well as stable and a safe place to raise a family.

They are looking to reconsider the rental lifestyle, where rental rates have been rising and are likely to continue to rise for the foreseeable future.

In our fourth quarter, we've seen real evidence of these changes in the field.

We are experiencing more traffic in our Welcome Home Centers, and customers are actively discussing their desire to find a way to purchase and avoid the rental market and its repricing.

Perhaps most importantly, we've seen consistent sales pace at stabilize prices throughout our fourth quarter and even through December during the season that is generally the most difficult time of the year.

Our steady traffic and sales rate indicate, stronger demand trends than prior-years, when sales just dropped off at this time of the year.

New orders are up 20% over last year and our backlog is up 35% over last year.

These improved results come with prices and margins that are consistent with or marginally better than our current deliveries, which indicates that we are not and have not been reaching for volume.

It is likely that the national numbers will not reflect these results because they will incorporate in their data many tertiary markets that did not affect our competitive landscape.

But the more desirable housing markets are experiencing a fundamental change as foreclosure inventories have been absorbed in these markets and the consumer recognizes the value proposition.

This is the consistent message from our divisions reflecting their interactions in the field.

Now, let me give you a few brief comments on our fourth quarter and year-end.

It's well documented that 2011 has been another difficult year for the housing market.

Prices continue to decline across the country by another 4% plus while the volume of new homes sold in the US has remained at historically low levels.

Against this backdrop, we've performed consistently on all fronts.

All of our business segments, Home Building, Financial Services, and Rialto have remained profitable in the quarter and for the year, producing $0.16 for the quarter and $0.48 for the year.

Most importantly, the basic metrics that defined our business have been carefully managed through this difficult year.

Margins have remained consistently high, and we expect will remain in the 19.5% to 21.5% range in 2012.

SG&A has been improving through the year and was at 13.8% for the quarter.

Average sales price has been steady at about $243,000, while incentives have been declining.

Alongside of our Home Building activities, our Financial Services group has also been holding steady and positioning for recovery while remaining profitable as well.

Our Rialto segment has also produced consistent profits as it's grown through a turbulent year.

While Rialto earnings have been clouded by mark-to-market adjustments relative to our PEPIP securities program, with these adjustments stripped away, we are starting to see the real earnings power of the Rialto machine.

Rialto completed its money raised for the first Fund in Q4 and ended with a $700 million pool of capital to invest in strategic assets to drive its future.

To date, about 70% of that Fund is invested and the pipeline for new investments is strong.

As we look ahead, Rialto should continue to be a solid earnings contributor for Lennar and will begin to return cash to Corporate as it is now investing self generated funds.

All in all, 2011 has been an excellent year for Lennar.

As we have navigated the turbulent waters of the housing market and the US economy, seeking a bottom and grasping for stability.

Our strategy has been to refine and position our Company for a recovery and remain marginally profitable while we stay patient.

And we've done exactly that.

All of the segments of our Company are extremely well positioned as you will now hear from our operating team.

As I look ahead to 2012, I am cautiously optimistic that we are seeing a real bottom form and that we will begin to see signs of recovery.

National statistics and news will give us mixed signals as we move through the year, as they represent the compendium of all of the best and the worst markets around the country.

But I feel that stabilization and recovery will emanate from the most desirable markets and spread slowly outward over years.

Lennar is positioned with a strong balance sheet, in the right markets, with an exceptional management team, and a well constructed strategy to perform solidly as market conditions begin to improve.

With that, let me turn over to Rick Beckwitt.

Thanks, Stuart.

During the fourth quarter, we continue to focus on acquiring or optioning new home sites that would have a positive impact on our bottom line.

Our primary focus was pursuing distressed opportunities and we spent a lot of time in one-on-one negotiations with banks and other extremely motivated sellers.

This quarter we purchased approximately 3,800 home sites, totaling approximately $162 million and we spent approximately $56 million on land development.

In addition, we optioned almost 1,100 home sites.

Our new acquisitions were located in markets where we saw the greatest market strength and value proposition.

Our focus within these markets has been on highly desirable communities, located in some markets where people really want to live, and where foreclosed homes have already been absorbed.

Whether the hook is -- schools; spectacular amenities; commute time, each one of these new deals has been hand selected with a very specific target buyer and product in mind.

In short, we invested in A-plus assets and stayed away from the fringe or tertiary locations where price was the only driver and where foreclosure activity remains.

We also have insisted that we have a cost-effective home design in hand before we buy any land, which has allowed us to streamline the time period between when we buy land and when we are open for sales.

It's been a true cash-on-cash focus.

From a geographic standpoint, during the fourth quarter, approximately -- 33% of our new acquisitions were located in Florida; 19% in the Carolinas; 14% in Maryland and Virginia; 11% in California; 10% in Texas; with the remaining 13% spread throughout our other markets.

As in prior quarters, the lion's share of our new land deals were sourced outside of a competitive bid environment.

We've stayed away from the typical broker-to-bid type deals and rolled up our sleeves and directly sourced the majority of our land transactions.

In many of our acquisitions, with the help of our Rialto operation, we have purchased debt at a deep discount and subsequently foreclosed on the real estate and an incredibly attractive land basis.

We have also backed into land through the purchase of community development district bonds, tax certificates, deed and lieus and short sale arrangements.

In fact, some of the more complicated and unique transactions have created the most upside earnings potential.

Regardless of how each deal was sourced, all of our new deals in the quarter were underwritten with extremely conservative assumptions.

As in the past, they have assumed no price appreciation, and in many cases price declines and slower absorption paces.

In all of these deals, we have required gross margins to exceed 20% and IRRs to exceed 20%.

To date, we have been extremely pleased with the performance of our new land acquisitions.

During the fourth quarter, approximately 41% of our deliveries came from communities purchased or put under contract during the last three years.

Our gross margin on the closings in these communities was approximately 200 basis points higher than the gross margin for the entire Company in the fourth quarter.

Outside of our traditional land acquisition activities, in late December, we expanded our operations into the Pacific Northwest, through the acquisition of a portfolio of communities from Seattle-based Premier Communities.

Led by Ryan McGowen, Premier has been delivering homes and developing land in the Seattle area for several decades.

We now own and control approximately 855 home sites in 23 communities.

These communities are ideally situated in a very tight and constrained land market.

We are extremely excited with the prospects of this new operation and welcome Ryan and his team to the Lennar family.

Before I turn it over to Jon Jaffe, Chief Operating Officer, let me give you some final stats.

On a year-over-year basis, our inventory increased about $300 million to approximately $4 billion and this excludes consolidated inventory not owned and an approximately $14 million investment in Seattle in the first quarter of 2012.

Since the beginning of 2009, when we really started our land acquisition efforts, we've invested over $1.5 billion to purchase approximately 32,700 home sites.

In addition, we have optioned several thousand additional home sites during this period.

As reflected in our industry-leading gross margins, which have increased significantly during this time period, there can be no question that we've invested wisely.

At November 30, we owned and controlled 111,386 home sites and had 422 active communities.

As we move through 2012, you should see a 5% to 10% increase in our community count, and the continued positive contribution to our operating margins from our new investments.

I'd like to thank our Lennar and Rialto associates for their hard work during 2011.

I have no doubt that we have the most talented team in the business.

I'd like Jon to now talk about the operations.

Thank you, Rick, and good morning.

We are very proud of the pre-impairment 21.6% gross margin and 7.8% operating margin we delivered in our fourth quarter.

Respectively, 80 basis points and 110 basis point improvements.

This achievement did not come about without a lot of focus and attention by management on each of the component parts of our business.

I would like to speak to our Company strategy on maximizing sales and margins, our intense focus on managing direct costs, and our overall focus on leveraging our operating structure to reduce overhead levels.

Our sales focus remains a market-by-market, community-by-community understanding of today's home buying consumers wants and needs.

Through the execution of our Everything's Included platform, we deliver value by targeting the right product and features in every community.

Each Lennar division offers home designs, square footages, and included features that present a great value to the home buyer.

Lennar's Everything's Included approach is especially effective as we compete against resales by highlighting the energy-efficient, technological, and quality features that demonstrate there's nothing like new when it comes to buying a home.

Much of our sales strength in the fourth quarter was driven by the performance of our new communities where we are achieving a higher sales pace as compared to our legacy communities.

These newer communities are well-located, properly position, and priced to appeal to today's home buyers.

As Rick noted, 41% of our deliveries were from new communities.

New orders from these same new communities increased from 27% of our sales in the fourth quarter of 2010, to 44% in the fourth quarter of 2011.

Overall, as Stuart mentioned, we are seeing better traffic, both in terms of quality and quantity.

But more so from the quality perspective, representing the customer desire to make a buying decision now.

While we are seeing these better patterns, we also continue to experience a very difficult mortgage approval environment.

Which is restricting the ability of a growing demand to become home buyers.

As the mortgage market eventually corrects itself, we expect more of this demand to be freed up.

In the fourth quarter, we saw strong year-over-year sales growth in all of the Florida markets, Atlanta, and North Carolina in the Southeast, Phoenix and Vegas in the Southwest and in parts of California.

There was a slight pickup in Houston, but overall Texas was relatively flat.

While we don't give data on the current quarter activity, I can tell you that we saw improved year-over-year sales -- I'm sorry, improved year-over-year sales trend through December.

And while the year-over-year improvement varies slightly by market from the fourth quarter, every one of our markets showed improvement in December from the prior-year.

Our management team is also very focused on the cost side of the margin equation.

Our current average direct cost of homes remains around $40 per square foot.

We've maintained this cost level by value engineering at a more granular level than we have ever before.

Our costs are broken down into detail categories, where we measure performance of these categories across all of our divisions.

This, combined with detailed and effective management of the building process in the field, has allowed us to keep our cost down by over 30% from the 2006 peak.

This has been accomplished this year despite various fluctuations of some materials and commodities.

I want to recognize the hard work of our national and local purchasing teams along with our operating divisions for their drive in finding new solutions and implementing new processes that allow us to deliver better quality and value in the home.

We've also maintained our focus on cycle time, which is down almost 30% from the peak.

This represents an average build time of between 90 to 100 calendar days for single family detached homes.

We have accomplished this by working hard and hand-in-hand with our trade partners in designing and building more efficient, value engineered homes.

This effort has allowed us to control our field costs and effectively manage the delivery of our inventory.

We have also maintained our intense focus on management of our SG&A.

Our SG&A for the fourth quarter was at 13.8% which is the lowest level we have achieved in five years.

This represents a 30 basis point improvement over the prior-year, and begins to show the opportunity to leverage our operating structure.

This was accomplished despite the startup costs associated with our new community growth as well as the commissions associated with greater broker participation.

There is an increasing trend of third party brokers bringing their buyers to us, which we believe is evidence of the growing awareness of the ease and value of the new home purchase versus resale.

They'll put our overhead focus into perspective.

The fourth quarter spend of $112 million compares to $484 million in Q4 of 2006.

As Stuart and Rick have mentioned, we have just completed our operations reviews with each of our Home Building divisions.

Across the board, we have a team that is energized to execute on our strategy of maximizing sales revenue, reducing the cost of sales, and delivering industry-leading operating margins.

Thank you.

And I'd now like to turn it over to Jeff Krasnoff.

Thanks, Jon, and good morning everyone.

As Stuart mentioned in his opening remarks, Rialto is beginning to hit its stride and demonstrate its earnings capacity.

Before Bruce reviews the details behind Rialto's $8 million of operating earnings, along with the results of the rest of the Company, there are a few areas that might be helpful to touch on to give you little bit more perspective on what's going on at Rialto.

With the backdrop of uncertainty in Europe, we've nonetheless continued to see what amounts to positive dynamics for the new deal flow in the markets in which we operate.

US banks are still under pressure to sell real estate assets and the prospect that foreign banks will also be shedding assets has added further downward pressure on the pricing of many opportunities, especially where we believe we continue to have a competitive advantage.

Therefore, the opportunity to purchase both real estate backed loans and securities is as strong if not stronger than ever.

We have remained focused on evaluating and if we can continue to price advantageously acquiring distressed portfolios, commercial mortgage backed securities, and other related assets through our current exclusive investment vehicle, the Rialto Real Estate Fund.

As Stuart mentioned during the quarter, the Fund had its final closing of equity commitments bringing the total to $700 million including the $75 million commitment from us and from over two dozen different investor groups.

The Fund has now been able to acquire or tie up a total of 28 different negotiated transactions.

And our pipeline of new potential investments remains strong.

This has resulted in the investment of a little over $500 million of Fund equity, to acquire almost $1.5 billion of assets based on unpaid principle balance, for about $0.37 on the $1.

And now, with about $200 million of equity remaining to be called, we're currently focusing on bringing out our next investment Fund.

We believe these and future vehicles will not only help to enhance the Company's returns and add consistent cash flows back to Corporate, but will also be important building blocks for us to develop a first class investment management business.

Almost 75% of our Fund investments so far have been distressed portfolios from regional community banks, CMBS special servicers and non-bank financial institutions.

The remaining investments are in new issue CMBS securities with strong current cash flows where we have found risk-adjusted pricing dynamics unlike any we have seen since the early days of that business dating back to the mid-1990s.

Our focus Rialto team of 180 strong continues to push the resolution process forward, enhanced by the well coordinated resources of the rest of the Lennar team.

Being able to integrate the unique talents of a leading nationwide residential developer and home builder has been and continues to be a unique advantage for us.

And in turn as part of this active collaboration, led by Eric Feder, who oversees our bank relationships, the Home Building divisions have been able to continue to capture distressed opportunities from the same institutions we've been working with on the portfolio.

As you have heard, this is providing a great mechanism to generate new communities for Home Building at extremely attractive pricing.

Since we began investing in distressed assets at the end of the first quarter of 2010, we have as of now, collected gross over $550 million of cash, including over $120 million from the sales of real estate owned.

Included as part of this, the FDIC transaction partnerships, now hold over $320 million of cash on their balance sheets, including approximately $260 million earmarked to DIF fees the $627 million of FDIC seller financing.

Market uncertainty has been responsible for keeping us from having one of our most profitable quarters yet.

As a result of the $7.6 million unrealized loss related to our share of the mark-to-market on our PEPIP Fund.

And for the year, these marks have aggregated $21.4 million.

However, these marks as required by US Treasury, we believe reflect more the general sentiment in the marketplace, related to the potential need for European banks to liquidate fixed income assets.

We have not changed our view of the resilient underlying cash flows that we use to underwrite and price our PEPIP investments.

In fact, our PEPIP Fund has been actively looking to acquire additional securities.

And to date, exclusive of the marks, we've already recognized approximately $23 million in interest income and fees related to our $68 million investment in and management of the Fund.

So these are just a few of the reasons we remain very excited about the continued progress of our Rialto franchise, our current position in the marketplace and the synergies with the rest of the Lennar team.

Thank you and I'll turn it over to Bruce.

Thanks, Jeff, and good morning.

This is our seventh consecutive quarter of profitability and our fourth quarter results reflect strong core operating earnings that were partially offset by Home Building impairments of $17.9 million and a PEPIP mark-to-market that Jeff discussed that's an unrealized loss of $7.6 million.

Let me review the numbers in all three segments starting with Home Building.

Revenues from home sales increased 13% to $817 million, driven by a 10% increase in wholly-owned deliveries, and a 2% increase in average sales price to $243,000.

The average sales price by region is as follows -- and please note, that we were required to change our reportable segments this quarter as noted in our press release, so you will see a new Southeast Florida region, while Georgia and the Carolinas have moved from the other region to the East region.

East average sales price was $221,000, up 3%; Southeast Florida was $265,000, up 1%, Central was $211,000 up 2%; Houston $228,000, up 5%; West $307,000, down 3%; and other was $339,000, down 9%.

As was mentioned, our gross margin on home sales before impairments was 21.6% in the fourth quarter which was an 80 basis point improvement compared to the prior-year.

In our last conference call, we provided a gross margin percentage range for the fourth quarter, before impairments of 19% to 21%.

We exceeded this range due to delivery and a more favorable product mix of higher gross margin percentage deliveries which includes an increasing percentage of deliveries from new communities that was mentioned.

And that's now 41% of our deliveries.

The gross margins were strongest in the East and the Southeast Florida regions this quarter.

Sales incentives as a percentage of home sale revenue decreased 20 basis points to 12.2% in the fourth quarter versus 12.4% in the prior-year.

As a result of the strong gross margins that were mentioned, and the improvement in SG&A that Jon discussed, our Home Building operating margins before impairments improved 110 basis points from the prior-year, to 7.8%.

During the quarter, we recognized the $4.7 million net gain relating to an asset distribution from a JV.

This was a linked transaction reflected on two income statement lines, earnings from unconsolidated entities, and other income.

When a joint venture determines it is disposing of assets, it needs to evaluate the assets at the lower of cost or market.

As a result, the joint venture was required to book an impairment.

The Company's share of this joint venture impairment was $57.6 million charge.

As part of the joint venture distribution, the Company received assets that were fair valued above its remaining investment account balance and that resulted in the $62.3 million gain.

The impairments during the quarter on the Home Building side were $17.9 million and that compares to $22.3 million in the prior-year.

Turning to Financial Services, that business segment generated operating earnings of $9.1 million versus $11.7 million last year.

Mortgage pretax income was $9.1 million, versus $11.1 million in the prior-year.

And during the quarter, we successfully entered into another confidential settlement with the second of three large banks that purchased the vast majority of our mortgage originations.

This settlement which totaled $2 million was within the accrued liability on our books for a potential mortgage put-back exposure and we now we have a remaining liability of approximately $6 million.

We are comfortable that, that's adequate for any future exposure.

Our Title Company generated $1.5 million of profits versus $1 million in prior-year and additionally, the Financial Service results include a $1.3 million reserve for the disposition of our last remaining cable system.

As Jeff mentioned, our Rialto business segment generated operating earnings totaling $8 million and this number includes $2 million of net losses attributable to non-controlling interest.

Rialto's operating earnings before the PEPIP mark-to-market adjustments showed significant improvement growing to $15.6 million during the quarter, versus $7.7 million in the prior-year, netting out the prior-year's PEPIP mark-to-market gain.

The composition of Rialto's $8 million of operating earnings by type of investment is as follows -- The FDIC portfolio contribution this quarter was break-even; the non-FDIC portfolios generated a $17.3 million gain; PEPIP, net of interest income and the mark-to-market had a $4.8 million loss; and there were $2 million contributed from the Rialto Real Estate Fund.

This was offset by approximately $6.4 million of general and administrative expenses which is net of management fees and reimbursements of approximately $3.7 million.

Although revenue from the FDIC portfolios were higher in the fourth quarter versus the prior-year, we experienced higher expenses relating primarily to property taxes and legal expenses relating to both servicing loans and REO resulting in the break-even quarter for the FDIC portfolios.

The $17.3 million contribution from the non-FDIC portfolios this quarter are primarily from deficiency recoveries, acretable interest income, gains upon foreclosure, and sales of REO, net of REO expenses.

Our 15% interest in the Rialto Real Estate Fund, generated approximately $2 million of profits which is in addition to the management fees highlighted above.

The $4.8 million loss during the quarter from our investment in PEPIP is reported as equity and earnings from unconsolidated entities and this loss is comprised of $7.6 million of unrealized loss due to mark-to-market adjustment, partially offset by $2.8 million of interest income.

The success of the Rialto Real Estate Fund has enabled us to grow Rialto using third party capital.

During the quarter, the Company didn't invest any new capital in the Rialto segment.

Rialto continues to generate strong cash flow and at quarter end there was already $219 million in the DIF fees and the cash account to retire debt and there was an additional $84 million of cash on Rialto's balance sheet.

The Company recognized a tax benefit in the fourth quarter of $13.7 million, relating to the favorable resolution of certain federal and state tax issues.

In computing our earnings per share for the quarter, the add back for interest relating to our convertible debt is $871,000.

We concluded the year with a strong liquid balance sheet.

Our leverage remained low as our Home Building debt to total capital net of the $1 billion of cash was 46.4%.

During the quarter, we paid off maturing senior notes of $113 million, there are no maturities now until 2013.

And we raised $400 million of new convertible notes with a 3.25% rate and a 37.5% premium and we received $350 million of that cash in the current quarter.

Shareholder's equity ended the year at $2.7 billion.

That's a book value per share amount of $14.31.

This book value per share does not include the fully reserved deferred tax asset which is currently $577 million, or $3.06 per outstanding share.

At year-end, the Company with the consultation of its auditors, evaluated whether the reserve on its deferred tax asset is still needed.

The relevant accounting guidance requires a very high threshold in order to conclude that the reserve is no longer needed.

Although the Company's strong performance and current positioning is bringing up closer to a conclusion that the reserve is no longer needed, we have concluded to defer a reversal until further evidence that the housing market recovery has been revealed.

We ended 2011 with our strongest quarterly backlog growth since 2002, up 35%.

This strong backlog coupled with our focus on strong gross margin percentages, positions us for another year of profitability in 2012.

Stuart indicated we are increasing our gross margin expectations for 2012 to be in a range of 19.5% to 21.5%.

And as usual our first quarter is expected to have seasonally lighter volume and gross margins at the lower end of our range, making it tough for it to be profitable in the first quarter.

However, we are well-positioned and we are looking forward to another year of profitability throughout the remainder of 2012.

And with that, let me open it up for questions.

(Operator Instructions) Ivy Zelman, Zelman & Associates.

Congratulations on a very strong quarter.

You had mentioned, Stuart, some brief comments about rent inflation helping to some extent for people to reevaluate the economics as it relates to owning versus renting.

Do you have any data that might support that in terms of serving the traffic that is coming through or people that are actually signing sales contracts that are saying they have been renters or maybe some anecdotes that can help us understand the opportunity?

Certainly there is plenty of people that arguably have been delaying purchases that might be a significant opportunity and I just want to hear your thoughts on that, please.

Yes, when we talk about data, data gets a little bit convoluted.

What we specifically did, Ivy, is we went out and looked at the competitive landscape relative to communities in specific markets.

And we actually put together a little presentation on it that we shared in some of our presentations and we'll probably continue to.

And we've looked at the fully-loaded costs of home ownership as compared with the rental rates that are in a competitive radius of communities where we are actively selling.

So, this is real information from real markets where we are competing.

Now, if you were to broaden the thought -- the radius, if you were to expand the radius, you might find that the data doesn't hold up, but in a real competitive environment at a local level, we're finding that there are two things that work.

Number One is a value proposition, the fully-loaded costs of home ownership is at or lower and generally lower than the competitive rental communities.

And then perhaps more importantly, in the more desirable areas, rental prices, which reprice every 12 months, have been trending upward anywhere from 5% to 15% in selected markets.

It is a combination of the value proposition and the notion that the cost of living expenses are going to go up, are going up and are going to continue to go up, that are driving people to say, I've got to lock this expense down or it can run away from me.

It is reducing my personal disposable income when wages are not rising and so it is driving more traffic to our sales centers.

Just -- I don't want to say this is my follow-up question, because I want to save that one, but just to clarify, Stuart, on your analysis, this doesn't also include the benefit assuming the mortgage interest deduction as well as assuming you're talking comparing apartment renting to single family ownership, just to clarify and then I have a follow-up.

Okay, yes, that is a good clarification, so we won't count it as your follow-up.

But we actually decidedly did not include the mortgage interest deduction, because of all of the discussion out there that it could be, might be, vulnerable.

We wanted to take a more pure look as a consumer might look at it.

Anytime there is a question mark, it might be discounted, even without the mortgage interest deduction, the comparison is favorable in many communities across the country, ownership versus renting.

Ivy, this is Jon.

I would also add that seeing surveys, I don't know exactly the group's survey, but in real estate publications, that consistently state that a very high percentage around 70% of renters do look at home ownership in their future.

And I would also just add anecdotally, in select markets, I have heard from apartment owners of an increasing number, the churn over going to look -- going to home ownership versus other rentals.

No, we've heard the same.

We did a survey like that, Jon, maybe you were reading our survey, so hopefully that was the case.

But to bring up my second question, Stuart, you talk about the stringency of mortgage availability.

Certainly everyone recognizes that, but what I'd like you to hopefully clarify to the listeners, is that mortgage credit may be stringent, but I don't believe that there are people that were limited in terms of the pool of people that assuming confidence comes back, that mortgages are not going to be something that would limit the number of home buyers.

In other words, you grew -- your year-over-year sales were up 20%, assuming those people are going to close with modest cancellations, I would assume that there is no change favorably to mortgage availability, but you have more confidence that people are stepping into the market.

So, if I asked you in three years from now, and you were seeing a pickup in sales activity, would you say there is a limit to how fast your sales can grow because the mortgage stringency or is it really more confidence that is limiting you and there is plenty of people that have higher than a 640 FICA score or that can come up with 5% or 10% down payment?

It's just a confidence issue that is really limiting it.

And certainly it would help to have easier credit, but it doesn't -- at least the mortgage companies we talked to, doesn't limit the opportunity to see a recovery in housing.

Well, look, I think -- I want to be careful not to be guided by your question, but I think that the mortgage market under all circumstances right now is choppy.

And the process for mortgage approval is somewhat limiting.

There are many people who don't have the qualifications.

Some of the -- many of the people that don't have the qualifications are burning off the needed years between a short sale or a bankruptcy or a foreclosure to get to the point where they're allowed to get back into the mortgage market.

Some of them are regenerating a good credit score, some of them are accumulating a down payment.

The qualification side of the mortgage market is difficult.

It is choppy and it is somewhat limiting today.

But we are living in a dynamic world where that is changing.

At the same time, the process has become intensely cumbersome.

The request for documentation seems to be never ending and the process together with the qualifications are the result of an overcorrection.

That overcorrection, in my opinion, is going to find a way to burn off.

That is, the overcorrection is going to find a way to burn off over time.

But as with any pendulum swing, it take some time for the pendulum to find its equilibrium and I believe it will.

So, with demand coming to the market in an increased measure and with the mortgage qualification market in process being somewhat stringent and limiting, I think the two will work together, increased demand and mortgage market reaching equilibrium, and over time, we're going to see demand really start to peak up.

Now whether that is in 2012 or whether it takes more time for the markets to settle and stuff, it is yet to be seen and I don't want to opine on that.

But I think that over time, we're going to see demand push through the stringency of the mortgage market.

Congratulations again, guys.

Stephen Kim, Barclays Capital

Congratulations on a good quarter in a tough environment.

I also believe that the mortgage availability really isn't the primary impediment, that it is primarily an issue of confidence.

In that vein, I was wondering if you could talk about the trends you're seeing in traffic relative to the trends that we saw in orders or you are seeing in orders.

Are you seeing traffic increase at a faster rate year-over-year or however you choose to look at it, relative to orders or vice versa?

While, again, it is very slightly from market to market, but we are, I think in general seeing traffic increase at a faster rate.

But I said earlier that the biggest difference we're seeing is in a greater desire to make the buying decisions as compared to prior periods in the year.

Yes, that's really great.

I guess the second question that I had relates to your subdivision count.

In particular, what I'm curious about is you had -- I think you had given guidance that community count be up roughly 5% or so in 2012, but obviously, if, what you're seeing is in fact a harbinger of an improved spring selling season, one would think that you might be tempted to tweak up your subdivision count to capture some of that volume.

You having one of those stronger balance sheets in the industry would be better able to do that, one would think.

So I was curious if you could give us an idea of your capacity to increase your subdivision count greater than the 5% that you mentioned?

Steve, it is Rick.

There is no question we have got the dry powder to press it up if the opportunities are there, but as you have seen us over the last several years, we've been investing wisely.

As the market starts to increase, we're going to get increased absorptions from our existing communities.

We'll invest in new communities and there is no question in my mind that if there are good deals out there, we will find them first.

With regard to community count, in 2011.

What I can tell you is, while we did give guidance through the year that we though community count would be up, there is a lot of communities that come in and out intra-quarter either through option deals where we have very little or no earnest money, that you guys don't see if they're successful they stay on, if they're not we move out.

But most of those things still add to positive contribution on a net margin basis intra-quarter.

So as we look at 2012, we gave guidance for 5% to 10% increase, I think it will be every bit of that, but we're just going to invest wisely throughout the year.

Michael Rehaut, JPMorgan.

First question, I was hoping just to get perhaps a little bit more granular on the order trends during the quarter.

It looks like absorption or sales per community actually improved 8%, 10% sequentially versus, I think, Stuart you said last year fell off a little bit as is typical in 4Q versus 3Q.

I was wondering if you could take us through -- if that was driven by a couple of sub-markets, certainly, there is huge order growth in Southeast Florida or the fact that as a mix basis, you have a higher percentage of newer communities, I think you said driving 44% of your orders, if that picked up materially from the third quarter?

Any more granularity there would be helpful.

Okay, the new orders in the quarter, we indicated about 44% were coming from the new communities, but we've seen most of that success, and I think Jon got into this a bit, coming from more of the new communities that we have been opening, but it is really been throughout the quarter, success throughout the country.

It hasn't been one market that we've experienced the success.

Still a little more color, I think that the areas where we saw the greatest improvement in sales from the communities as we mentioned was Southeast Florida; but also in Central Florida in the Raleigh area, as an example; in Dallas-Fort Worth and in Texas we saw that pick up; in Orange County, California; in Colorado.

In markets like that, we had dramatic increases in our activity in our new communities year-over-year.

Okay.

I guess the second question, just on the gross margins.

It looks like you're increasing the range that you think is possible, by maybe 50 BPS or more, and this quarter, you exceeded the range that you had guided to in terms of 21.6%, over the 21% high end of the range.

Is there any reason to think that you wouldn't be able to at least achieve the higher end of this range for fiscal 2012, outside of any major mix shift in deliveries maybe by region?

Because certainly over the last couple of quarters now, you've been at that high end of the range.

Any color there would be helpful, particularly as you pointed to this quarter being also positively influenced by mix?

Well, let me say this, Mike.

We've given a range and I think that, that's where we are comfortable right now.

There are moving parts and we are rounding the corner to come into our first quarter.

Our first quarter is always lighter volume.

We have lower expectations for our first quarter and we want to make sure that we keep everybody's perspective properly focused on the short-term and the longer-term year-end.

So, we are giving a range.

We did throw out a couple of numbers and I want to make sure that they are clear.

44% of our new orders came from new communities and 41% of our deliveries came from new communities.

So, you can see that we have -- kind of trend wise, new communities are increasing their representation in the flow of -- or in the composition of our gross margin.

But we recognize that our first quarter is likely to be a little bit lighter.

Where will we be within that range?

We are going to wait and see what the composition brings to us.

But we do feel comfortable, Number One, with the range we've put out there, and Number Two, with the fact that we did bring the range up by about 50 BPS.

Great, one quick follow-up on the first question, if it is possible on the community count?

You were down 4% year-over-year in the fourth quarter and you're guiding for up 5% to 10% for the full year, would we expect that 5% to 10% to be more back half weighted or should we expect more of a move in the first quarter?

As we announced in a press release on the Pacific Northwest, we brought in some additional communities in the Seattle area.

So you will see some community count growth as those start to build out through the year.

Most of those opportunities were really land or option contracts that we've got to get going in.

The Seattle market is a little bit unique.

They are smaller communities from an overall size standpoint, so their overall contribution to the whole will be somewhat less.

But with regard to the overall year, you'll see it more in the back-end half of the year and it is going to be skewed somewhat by what the opportunities are out there.

David Goldberg, UBS

This is Susan on for David today.

First I wanted to get your thoughts around some of the recent news that we've seen regarding government efforts to support housing.

A week or so ago the Fed came out with a report that suggests the government could be warming up to the idea of allowing some larger more institutional capital to play perhaps a more meaningful role in the buy-to-rent market.

Can you just give us your thoughts on this and maybe what you think it could indicate in terms of the government supporting different initiatives to help housing?

Well, I think that there has been more than just the discussion of the government buy-to-rent program.

There has also been HARP 2.0 that has been out there.

The most important thing to think about is the fact that the government is recognizing that stability in the housing market is important.

It is important to refocus the attention on how we enable the housing market to recover.

I think that portends good things for housing in general.

Certainly, redeploying some of the idle inventory to the rental market will be helpful.

It will bring less supply on the For Sale market and will enable the For Sale market to absorb the overhang of foreclosures more rapidly.

It will deploy those assets into much-needed rental housing.

Anything that the government can do to enable the borrowers out there to decide not to strategically default will help the foreclosure market begin to resolve itself as well.

So, our thoughts are that together with fundamental demand coming back, anything that reduces the amount of supply of foreclosure homes on the market is going to be a benefit.

And the government is certainly thinking and working in that direction.

Okay, thanks.

Then just as a quick follow-up, I think it was Jon that mentioned, your ability to maintain your direct costs over the quarter.

Given the volatility we've seen in some commodities and the fact that maybe conditions are starting to stabilize a bit, are you starting to see any increased pressure from some of your suppliers to raise prices?

Are you having to push back anymore on this?

Talk a little bit about maybe how you're offsetting it if you are seeing any of that.

As I mentioned, there have been impacts from certain materials or commodities.

The most recent example of that, I think everyone is aware of is drywall, where there's been increases.

We focus on both maintaining our cost on the material, focus item by item, but also on the process.

And as I said, really managing the opportunities to find, at a very detailed level, the value and what is happening out in the field, what is happening within our cost code item by item and really driving efficiencies in that regard.

So, it is a constant battle of managing the fluctuations in the material and commodity market with what we can do operationally to offset that and maintain our low-costs.

Stephen East, Ticonderoga Securities

Stuart, you talked or in the press release you all talked about incentives and they've stayed sort of flat.

If we look at that, what is the normalized level and if we are starting to see the market recover and order trends pick up, et cetera, do you expect that to start to drop as we move through 2012 or is that more an entrenched type process that we are going through?

Well, look, incentives are a funny thing.

More normalized level, when you go back to really normalized market conditions, you're in the 5% to 10% range.

Incentives are in part a composition of sales price.

It is a tricky thing to figure out where things actually lie.

But the fact is that the market is stabilizing and the first place that we are going to see sales price regenerate itself is with the incentives.

Certainly, that is stabilizing and coming down a little bit and contributing to our margin.

Okay, do you expect that the incentives to back off as we move through the year?

Well, Stephen, I have a perspective that the market is stabilizing.

It is going to take some recovery for the incentives to really back off.

On the one hand, I think that -- I feel cautiously optimistic about what is happening with the market right now and into 2012.

But I don't want to get ahead of this market.

It has been choppy and rocky.

And so I would say we are going to wait and see.

We are going to carefully manage our business and manage the process.

I can tell you that Rick and Jon are looking at incentives and sale prices every single day with every division and that is being managed week by week in the field.

So, to the extent that the market allows it, we are going to be right on it and make sure that incentives are coming down.

This is Jon.

No, I would add too that the foreclosure environment is still out there and we compete against it.

And how we position our product with incentives, without incentives as we compete to show the new home as a value is going to continue to affect what you see in terms of incentive levels.

So, as Stuart said, you've got to be really careful how you analyze it between growth sales price and incentives and how you're positioning value.

Steve, were managing the business to a net price --

I've got you.

Now that --

And whether it's across the line or below the line, in a more normalized market, it's closing costs, we're not at that juncture right now.

But as the market recovers, that's the direction that we're going to take it.

It's just going to take awhile to get there.

I've got you.

So a lot of it's optics to get to that net price.

The other thing, investors when they look at this space, they've listened to a lot of the builders talk about, all right, we have a tremendous ability to ramp up our operational leverage because we are selling it at two homes and when we get to four we still don't need to add people, et cetera.

We're still not seeing it.

We haven't really seen it in your numbers this quarter.

Is there something going on this quarter on a year-over-year basis that your SG&A really didn't change?

And do you expect that to start to change pretty rapidly if you start piling on 20%- a-quarter type order rates?

Well, Steven, it is important to look right now at -- we're at an interesting point.

If we look back at the year 2011, we're really flat with 2010, so there is really not any real operational leverage that has been liberated at this point.

As I noted in my comments, our posture has been to navigate the toughest part of this market as it looks for recovery and to remain marginally profitable as we stay patient.

So the operational leverage that we and other builders have talked about has not yet presented itself.

The movement from 1, 1.5 to 2 sales, to 4 sales per community per month will present itself and present itself, I think very decidedly when we start to see real recovery in the marketplace.

And we are just not quite there yet.

So, looking back at 2011, we're kind of flat.

As we start to see volumes jump up, those volumes should have an embedded operational leverage in them.

Okay, if I could sneak in one quick one.

On the PEPIP, the mark-to-market, are these securities typically held to maturity?

Yes, that was the plan, Stephen.

When we buy them, we really look to what the cash flows look like over the life and clearly if there's an opportunity, over the life to sell them and to maximize value at some point between now and that maturity, we would do it.

But that's really -- when we went into it, that was how we looked at it.

And by the way, with that said, it is why, we are not big on recasting our numbers.

But we think it is important to look at the Rialto earnings machine without the PEPIP either contribution or detraction, because it is a clearer picture of what is really happening in Rialto.

Exactly.

Nishu Sood, Deutsche Bank

This is Rob Hansen on for Nishu.

You mentioned that the affordability decision has been driving the new home purchases lately.

Where have you seen this come through in terms of your product line?

And I guess, really what we're trying to get at is, have you seen the kind of less seasonal first-time buyer come back and is that what helped you put up a pretty solid order over this quarter?

It's really been across the entire universe of the product line.

We have seen an increased traffic at the entry level, first-time buyer, we've seen a pick up clearly in that mid-market and some of our higher-end product has been performing pretty well.

Stuart talked a little bit earlier about this value proposition change between the rental world and the For Sale world.

And we have seen some evidence that is beyond the surveys.

So in our traditional marketing approaches, we do eBlast or emails to -- targeted at the rental world.

We have done door fliers and when we do that, we see traffic coming, because people are understanding that the overall ownership equation versus the rental equation pencils out.

So, it is really across the price per segment.

Okay, and then, yes, on some of your interesting marketing initiatives, we noticed on your website, that you have a section that is devoted entirely to people who have been through a foreclosure before.

So, are you seeing a meaningful amount of traffic from this group?

I would assume it is probably a little too early for that group to start buying, yet, but how much of the traffic comes from this area?

You really have three different types of people.

You have people who have gone through the short sale process.

They are generally taken out of the market for two years.

You have people that have gone through a foreclosure.

They are generally taken out of the market for three years.

And then you have people who have gone through a bankruptcy and they are taken out of the market for generally six or seven years.

Is it six or seven, Jon?

Seven.

Seven, okay.

So you have a sizable group of people across the country that have gone through a short sale process or foreclosure that are starting to come around the corner and reenter the market and even if they are not actually in the market, or the time hasn't quite lapsed, they are preparing to look at getting back in the market.

They are preparing their credit and their down payment, because they don't want to be vulnerable to the 12 month repricing that you get in the rental world.

And that is what we are seeing out there and they are active participants.

Just for clarity, this is Jon, that site and our social media effort focuses on renters who also didn't go through that distress, but have either made an active choice to rent for a period of time or just have credit issues that aren't necessarily derived out of a short sale or foreclosure, but just have to deal with their particular debt situation.

Or the situation of just needing to save for a down payment.

So we're really trying to communicate and reach out in an effective way to people who are interested in homeownership and need help and guidance in how to get there.

Bob Wetenhall, RBC.

Nice quarter.

Your ASPs are up $5,000 and your incentives are up only $200 year-over-year.

This is obviously a very favorable trend and I just wanted to see if you think this trend is expected to accelerate as we move into the spring selling season?

As we said, we are really managing towards a net price depending on the product, the division, the market, the community.

Each one of these -- each one of our homes are incentivized to sell in order to maximize margin.

We gave a little bit of color with regard to what our go-forward margin expectations in there -- to some degree our price expectations on sales prices are reflected in that increased range.

This is Jon, as Stuart said earlier, I think we really have to wait and see what the trend delivers to us and how sales volume materializes.

If we do see increased absorptions, we would expect that trend to continue, but if we see a leveling off, then you would expect flatness and that really is a result of that level of activity.

Understood, just turning to your SG&A spending.

I think you were at $120 million in 2009, and then subsequently, you've brought that under $100 million in each of the last two years.

Given your expectations for stronger volumes, are you still going to be able to keep SG&A close to $100 million next year or do you expect that is going to back towards the $120 million number.

Well, it depends on the volume that we are going to see.

So -- you're talking about the SG&A line, it is really dependent on the volume, Bob, that we are going to accomplish and how many new communities that we're going to be opening up.

I've got it.

And if I could sneak one in.

Would it be reasonable to look for Rialto to -- given attractive backlog you have, to contribute somewhere north of $50 million next year?

Is that a reasonable number to use?

I'm trying to understand how much visibility you guys have into that?

Yes, we haven't given any numbers.

You note the last two quarters, if you stripped out the PEPIP, we are around $15 million.

But we haven't given any projections because the timing of some of the sales and collections from the borrowers doesn't necessarily come in where you could schedule it perfectly.

So, we'll have to wait and see.

We haven't actually given a number out yet, Bob.

With that said, I don't want to diminish the fact that we are seeing -- and I think that we've highlighted for you, that we are starting to see real strength in earnings from the Rialto machine.

And we look forward to good performance as we go forward.

But at the bare minimum, this, what -- the trend you are seeing now with Rialto looks like it is sustainable into next year?

We're enthusiastic about Rialto's prospects as we move ahead.

Dan Oppenheim, Credit Suisse

Just wondering, when you're talking about the market and such, you're talking about a lot of areas that have worked through the foreclosures.

How do you -- as you look ahead, how do you think about that in terms of a lot of the foreclosures that have yet to come to market that have been stuck in the process?

Do you have any worries about that, especially in Florida where it's been a pretty gradual process there, how are you thinking about it?

Well, as I've noted, the foreclosure world when looked at from a broader perspective gets clouded by good markets, the best markets, good markets and not such good markets.

In the markets where we are targeting, and where we are making our purchases, and I think Rick did a good job of highlighting our strategy, that is decidedly away from areas where there are foreclosures to be had, our markets are generally focused on areas where the foreclosure and even the delinquency backlog has basically been absorbed because they are the more desirable areas to be purchasing.

And so, even where you might think that foreclosures have not yet been completely resolved, in order for a home to get to a foreclosure, it's got to either not be saleable at a price that can be realized or properly pay off of mortgage or at a price where a bank won't accept a short sale.

In the more desirable areas, short sales are taking place as an intervention method before you get to a foreclosure.

So in those markets, you're seeing a lot of clearing and we think the overhang is not nearly as severe.

Okay.

Well, we appreciate everybody's attention on our 2011 review.

We look forward to giving you more color as we go forward into 2012.

Thanks for your attention.

This will conclude today's conference.

All parties may disconnect at this time.